Insider Dealing

Question 1

Define what insider dealing is

Answer 1

1. Insider dealing refers to buying or selling securities of a public company using material non-public information.
2. Securities include shares, bonds, stock options, debentures, warrants, and public sector debt instruments.
3. Covered under Part V of the Criminal Justice Act 1993 (CJA).
4. Objective: Protect confidential company information and prevent insiders (such as employees, executives, or advisors) from using this private knowledge to gain an unfair advantage in the stock market.

Question 2

What are the three principle insider dealing offences?

Answer 2

1. Dealing while in possession of inside information.
2. Encouraging another to deal based on inside information.
3. Disclosing inside information to someone else, unless it is part of official duties.

Question 3

Define what material non-public information is

Answer 3

1. Specific and precise information about a company that has not been made public and, if disclosed, would likely have a significant impact on the company’s stock price.

E.g. Price sensitive information.

Question 4

What is the scope of the Criminal Justice Act 1993 (CJA), Part V?

Answer 4

1. Applies to trading on investment exchanges (e.g., London Stock Exchange).
2. Covers off-market deals arranged by professional intermediaries (such as brokers and market-makers).
3. Applies to both UK and overseas transactions where UK law has jurisdiction.
4. Does not typically cover accountants and solicitors unless they act as intermediaries in securities trading.

Question 5

What are the main defences to insider dealing that the CJA provides?

I.e. If someone is accused of insider dealing, they may use one of these defences to prove their actions were legal.

Answer 5

1. Proper Performance of Duties: Information was shared as part of official responsibilities, without expecting the recipient to trade.
2. No Profit or Loss Avoidance:
   The trade was not done to gain an unfair advantage.
   I.e. they didn’t trade for profit or to avoid a loss
3. FCA’s Stabilisation Rules:
   The trade was part of market stabilisation for new issues.
   I.e. stabilisation of company’s stock price after issuing new securities
4. Market-Maker Exemption:
   A market-maker (a financial institution providing liquidity in securities markets) may trade using inside information if it’s part of their normal business operations.
5. Reasonable Justification:
   The person only knew about a transaction taking place (e.g., company acquisitions), which was a reasonable basis to trade. But, they weren’t aware of the detailed price-sensitive information
6. Another defence: designed to protect regular business activities where the person trading didn’t get the non-public information to take advantage of it, but rather as part of their normal business practices.

Question 6

How do Chinese walls help with preventing insider dealing?

Answer 6

1. Chinese walls: Information barriers within financial firms to prevent conflicts of interest.
2. Example: Separating the corporate advisory team (handling mergers & takeovers) from the brokering department (advising clients on stock purchases).

Question 7

What are the penalties for an individual that is found guilty of insider dealing?

Answer 7

1. Magistrates Court (Summary Conviction):
   A. Fine (up to the statutory maximum)
   B. Imprisonment (up to 6 months)
   C. Or both
2. Crown Court (Conviction on Indictment):
   A. Unlimited fine
   B. Imprisonment (up to 10 years)
   C. Or both

Question 8

What are FCA’s powers with regards to investigating insider dealing with a firm?

Answer 8

1. The FCA can investigate and prosecute insider dealing and market manipulation.
2. Under Part 11 of the Financial Services and Markets Act 2000 (FSMA 2000), the FCA can:
   A. Compel individuals or firms to provide documents or information.
   B. Interview suspects under caution.
   C. Apply for warrants to search premises for evidence.
3. Failure to comply with FCA information requests is treated as contempt of court.